Are there any economic and financial affairs journalists who have not yet summarised or commented on the de Larosière report? Are there any concerned citizens who have not read at least a commentary on this document, which was in fact discussed at length in our publication? Reactions from the political community are not always tranquil because they obviously reflect the opinions of those expressing them (and who often regret that this report is not proposing a genuine European system for supervising and monitoring players from the financial world). After so many lectures and opinions being given, there is the awaited supplement: Jacques de Larosière himself explained what he wanted to do and the reasons behind his decisions. It is possible that he has given several interviews on this subject; the one I have in mind is the one with Yann-Antony Noghés and published in Le Tribune newspaper on 7 March.
I will leave the general considerations to one side and focus on Mr de Larosière's responses regarding the reasons behind his decisions and expectations:
1. Why not a single European supervisor? There are around 8,000 banks in the EU, with barely 40 of them forming multinational groups. Why control all of them, “through a single supervisor which is far removed from the field of play?” This would be an unwieldy system, “likely to produce divergences in application of the rules”. Mr de Larosière therefore prefers, “leaving it up to national supervisors to carry out their daily surveillance work of national establishments”.
2. Early warning and it implementation. Macro-financial supervision exists in theory but it, “has not been sufficiently accurate over recent years”. This is why the report formulates, “proposals for this early warning system to work effectively”. It proposes the setting up of a European Council for Systemic Risk, which will be chaired by the president of the European Central Bank (ECB) and made up of governors from the central banks of the eurozone, the presidents of the College of Supervisors and a representative from the European Commission. When this body detects risk “it will emit signals and make recommendations to the different institutions responsible for tackling these risks”, such as the central banks responsible for monetary policy, regulators for regulation and the supervisors. There will, however, be a follow-up: “All those who received a warning will have to report on their action and if nothing happens, the Council of Ministers of the EU will be called on”. This structure should be activated at an international level in order to set up a “global risk centre for detecting risks to financial instruments, markets or mountains of debts; so many debts that have so far not been dealt with…Credit has been developing for years without any relationship to economic growth”.
3. Harmonise sanctions, punish the guilty. In theory, there are sanctions against banks and other bodies that do not respect the rules: warnings, recommendations and possible licence withdrawal. The sanctions systems vary significantly, however, from country to country. According to Mr de Larosière, “harmonisation is necessary to prevent financial institutions trying to find supervisors with a light touch…There are, for example, great differences with regard to insider-dealing. Certain countries impose fines of several thousand euros, others' fines can go above €1 million”. Mr de Larosière's conclusion on this point remains categorical, “there needs to be a clean up operation”. With regard to those who do not respect the rules, “we can envisage sanctions focusing on own-fund obligations or measures restricting the field of action of a rating agency, indeed a ban on it continuing to carry out ratings in certain sectors”.
4. Agreement necessary for member states. Asked about the risk from one or other member state that does not accept his proposals (we are aware of the question of British reservations on the matter), Mr de Larosière pointed out that the Commission had retained its guidelines on both risk detection and harmonisation of the main financial rules. On the question of national positions, he would only say that “within the working group, there was unanimity on my proposals, which is encouraging”.
5. EU could play fundamental international role. In the context of the next G20 summit in London, I will stick to what Mr de Larosière said and not add any superfluous comments of my own: “I want Europe to speak with a single voice and the proposals we have made to be retained both in their essence and principle. In this case, Europe would have, vis-à-vis the other great monetary centres of the world, a credibility and authority which we do not necessarily have today. Being able to propose a coherent totality that includes the systemic detection system and recommends the principle to national regulatory authorities in other countries and the IMF, would be a major achievement for Europe. Until now, our actions have been too divided and fragmented - we have to better coordinate them.”
What we discover reading between the lines of the full Larosière report
The attentive reader will have by now deduced that Jacques de Larosière does not yet believe that national financial supervisors have accomplished their tasks adequately. By reading between the lines in the full report on this subject, we notice that it does not contain insubstantial or fleeting comments but rather, a highly critical comprehensive judgement which does not just take the inefficiency of the regulators to task in a few instances or so, but the real question of their autonomy and independence. It wasn't actually me who carried out the exercise but rather an attentive and perspicacious reader, Jean-Guy Giraud, advisor to the European Parliament on institutional questions.
After having observed that “progress accomplished since 2000 in the intergovernmental framework known as Lamfalussy, had not enabled the EU to identify or tackle the causes of the current financial crisis”, the report states (I'll use Mr Giraud's expression) “shortcomings were observed”. There now follows, in no particular order, an anthology of comments made by Mr Giraud taken from the text:
“Supervisors proved incapable of assessing the extent to which a number of financial establishments in the EU…had accumulated extremely high exposure to highly complex and ultimately non-cash products”.
“Often, financial supervisors have not had, in certain cases have not insisted on having, or obtained too late, all the information on the scale of the excessive lever-effect phenomenon”.
“They have not understood or evaluated the level of risk and do not appear to have shared information correctly with their counterparts in other member states”.
“Sharp international competition also contributed to national regulators and supervisors' reluctance to make unilateral decisions”.
“There were a significant number of shortcomings in the supervision of certain financial entities; supervisors failed to play a role that met their surveillance responsibilities”.
“The Group considers that it is useful to analyse and publish the reasons for these failures (e.g. Northern Rock, IKB, Fortis) in order to learn the lessons and improve the conduct of supervisors in the future”.
“While the crisis took hold at a precarious and vulnerable juncture for the financial bodies they supervise, the national supervisors were too often unwilling to discuss the issue with the required frankness”
The report makes an incisive conclusion from these observations: “Evidence clearly demonstrates that the supervisors' role in preventing the crisis was not adequately carried out and was ill-adapted to its objective” (although the shortcomings are also highlighted with regard to information exchange and collective decisions involving central banks and finance ministers).
Accusation clearly made. How can we not get the impression that an accusation is being clearly made against the system of national supervisors and, in a few cases, against certain specific supervisors, even if they have not been named? Even more so, given that the report recommends that at a subsidiary level: a) member states urgently strengthen their national supervisors by introducing practical solutions; b) the European Commission carries out, “an independent inquiry into all national supervisors” and presents recommendations for improving their independence”.
These affirmations and the tone of the whole of the report appears to us to indicate real resentment with regard to the behaviour of certain leaders and players from the financial community, which is even more significant considering that the authors of the report are not, in principle, opponents of the systems in place but people who have or have had direct responsibility for the areas they are talking about. The de Larosière report should not be considered as a document for specialists but as a text that - at least in the summarised form of this column, made possible thanks to an incisive journalist and an attentive able reader with a hint of mischievousness - ought to be known by at least all current and future MEPs.
(F.R./transl.rh)